Edited address by John Cummings, Chairman, National Association of Retail Grocers of Australia Convenience & Impulse Convention 2011

Parts of the Australian food and grocery industry are under duress at the moment and this is a good opportunity to consider what is happening and why. Let us consider some context for what is happening.

The Australian economy is worth about $1.5 trillion a year. Market capitalisation of all listed companies on the Australian Stock Exchange is about $1.3 trillion. Funds under management total about $900 billion.

The estimated value of Australian family businesses is just under $4.5 trillion, which is greater than the total value of the Australian Stock Exchange market capitalisation of all listed companies plus the value of all funds under management.

Many of those family businesses operate in the retail industry and many of them are in the business of selling groceries. Last year NARGA commissioned the research consultancy Accenture Australia to put some hard numbers to the entire paddock to plate supply chain. We thought it might help governments to understand the importance of the food and grocery industry as a whole to the Australian economy.

The retail sector is the second largest sector of the national economy, behind manufacturing and almost twice the size of the mining sector. It directly employs just under one million people.

Within the retail industry, supermarkets and grocery stores make up the largest sector, with turnover of $85.3 billion a year out of total retail turnover of $230.6 billion a year. In that sector, Woolworths and Coles have just under 80 per cent of the market. They also have 87 per cent of all supermarkets over 2500 square metres, most of them located in the major shopping centres which get most of the foot traffic.

Every other player in the sector - the independents, mainly under the IGA and FoodWorks banners - plus Aldi, Franklins, and the mum ‘n pop corner stores share the remaining 20 per cent.

Convenience stores, as I’m sure you know, have been losing market share in grocery sales for some years. That’s a drop from 12.3 per cent market share in 2004 to 9 per cent in 2009. And the tough economic conditions we’re currently experiencing have contributed to a further decline more recently, with people opting for lower prices over convenience.

That has driven a lot of customers back to the big supermarket chains and Coles price-cutting on key basic items like milk and bread has no doubt added impetus to that, with Woolworths, Aldi, Franklins and some independents being obliged to match the Coles prices or lose sales.

The dominance of Woolworths and Coles in the grocery sector is not new. Woolworths and Coles joint market share was only 34 per cent in 1975, which coincided with the start of operation of the Trade Practices Act 1974, administered by the Trade Practices Commission.

The big chains received a big boost to their market share in the mid 1990s. That coincided with an important amendment to the Trade Practices Act, the beginning of National Competition Policy under the Keating Government, and the establishment of the Australian Competition and Consumer Commission, which is supposed to promote competition. The big increases in the chains’ market share happened on the ACCC’s watch.

If nothing is done to interrupt that trajectory, we are headed toward a situation where competition is virtually eliminated from food and grocery retailing. That situation has already been exacerbated by Woolworths and Coles/Wesfarmers growth in other retailing sectors - liquor, hardware, hotels and gaming, general merchandise, office supplies, home electronics. The two big chains now account for 43 cents in every retail dollar spent in Australia.

Deloittes now ranks Woolworths and Coles in the top 30 biggest retailers in the world, and they’re operating in a population of only 22.5 million people. Clearly, Woolworths and Wesfarmers, Coles parent company, have market power in Australia that is not matched by any other retailing company in its own domestic market.

Wal-Mart, the biggest retailer in the world and Kroger, its biggest rival in the United States market, have a joint market share of only 20 per cent. The top five supermarket chains in the United Kingdom have 80 per cent, the same as the top two here.

How did that come about? Well there was a period from the mid-1990s until early this century when they picked up a lot of market share through creeping acquisitions - buying up independent stores one by one. They also picked up groups of stores when Dairy Farm International sold off their Franklins stores and again when Foodland Associated Limited sold their Action stores in Western Australia and on the east coast. At the same time, Metcash acquired FAL’s wholesaling business and other Action stores.

I mentioned earlier that there was an important change to the Trade Practices Act in the mid 1990s. On the recommendation of the Hilmer Committee, which developed what has come to be known as National Competition Policy, the Keating government repealed section 49 of the Trade Practices Act. Section 49 dealt with what is known as “anti-competitive price discrimination”. Anti-competitive price discrimination occurs when a supplier sells product to one or more customers at one price and to other customers at higher prices.

That has nothing to do with economies of scale. Economies of scale are still able to be applied to a sale. Let me give you some examples.

This is information we gave to the Senate Economics References Committee’s inquiry into dairy pricing last week.

Approximate costs in the milk supply chain in Australia
	Coles	Independents
Processor’s cost to produce 2 litre bottle of milk: $1.40
Distribution cost (vendor delivery)	$0.04/unit	$0.10/unit
Marketing cost 2% on wholesale price	Nil	$0.07/unit
Wholesale price to Coles (private label)	$1.50 (approx)
Wholesale price to independents (proprietary brand)		$3.50
Cumulative costs to retail point of sale	$1.54	$3.67
Coles retail price	$2.00
Independents’ retail list price		$4.29

As this table illustrates, the major cost differential in the drinking milk supply chain occurs in the discriminatory and anti-competitive prices offered by the processor to the large supermarket chains and the independents. It is the same milk, from the same processor, in the same packaging. The only genuine difference is the label.

Clearly, independent retailers and their customers, the buyers of branded milk products, are being obliged to cross-subsidise the major supermarket chains and their customers.

There is no valid reason why Coles should be getting a two litre bottle of milk two whole dollars cheaper than an independent retailer can get identical milk in an identical bottle. That is anti-competitive price discrimination.

National Foods were questioned by the senators about their pricing. The company’s representatives told the Senate committee that Nationl Foods made zero profit on their sales of milk to Coles and Woolworths under their private labels. Woolworths and Coles call tenders for the supply of their private label milk, but you can be assured that the tenderers know very well the sort of price they need to offer if they are to get the contract.

As we all know, Coles decided to sell 2 litre bottles of milk for $2 a bottle and that has been matched by most of the other players. Ian McLeod, the managing director of Coles supermarkets, claims that the company is absorbing the lower prices through their own margins. He also told Alan Jones on 2GB in March that Coles was buying their private label milk at $1.96 for a two litre bottle.

It is possible, under section 155 of what is now called the Competition and Consumer Act (formerly the Trade Practices Act) for the ACCC to oblige Coles to hand over every detail of their terms of trade with their dairy suppliers. There is no sign yet that they’ll do so and the $2 for 2 litres deal began on 26 January.

Dairy farmers are bearing the brunt of this massive miscalculation by Coles. It has received negligible media coverage, but the day before Coles announced their $2 price for milk, their chief dairy buyer was sacked. I’m assuming he had a conscience and was trying to talk them out of it.

Now farmers, some of them on margins of only a few cents a litre above break-even, are at great risk when new tenders are negotiated in the middle of this year.

Coles will not deny themselves a normal profit margin on a big category like milk indefinitely. They will try to claw some back from the dairy processors, who, themselves are not getting an adequate return on investment.

The processors’ need to recover some margin will almost certainly see them squeezing the prices they pay their farmers.

And it is very likely that many farmers will be forced out of the industry, taking down with them many small retailers who rely on milk sales to allow them to compete with the big chains. When milk sales fall, so do sales of other products, particularly in the smaller grocery stores and in convenience stores.

The Senate committee does seem to be intent on finding a path to recommend to the government. But, of course, the government must then be persuaded to actually do something about it.

We are strongly of the view that the original prohibition on anti-competitive price discrimination should be reintroduced to help deal with this problem. It was, in fact, originally introduced into our competition law to protect small retailers from exactly what the big supermarket chains are now doing and what they are doing is consciously and deliberately anti-competitive.

It’s not just happening in milk. It is occurring in liquor, general merchandise and other sectors. On top of these unfair and anti-competitive practices which threaten to wipe out parts of primary industry, dairy processing and a lot of small retailers, both independent grocers and convenience store operators have common interests in fighting a number of government policies.

Plain packaging of tobacco products will affect us all. That is a policy plan which will be costly, impose inefficiency on retailers, and be entirely ineffectual in reducing the incidence of tobacco use. Eighty per cent of the population do not smoke. They were therefore not influenced in any way when tobacco products were on open display and were not affected by having display of tobacco products restricted. They will not be affected by plain packaging and nor will smokers, except that the service they receive will be slower. In the smaller retail outlets, non-smoking customers will be delayed by the slower service available to smokers.

It will also set a precedent because governments will, in effect, steal the intellectual property - the brands, the logos, the corporate colours and designs - of the tobacco companies. Those who oppose tobacco use will probably cheer that, but it sets a very nasty precedent. What other products will the punishers target next? Alcohol? Almost certainly. Fatty foods? You bet.

Is that the kind of retail environment we want?

If our food production sectors are threatened by the anti-competitive practices of the dominant supermarket chains, they are also going to be impacted by governments.

The Murray-Darling Basin plan is on hold. We hope that the original plan has been abandoned, not just revised. The “guide to a plan” which was put to the federal government would have taken 30 per cent of the water from the region which produces 40 per cent of Australia’s food. What effect would that have on food and grocery prices?

Our Accenture research highlighted three important trends:

• Australian food consumption is growing faster than population


• Food consumption is growing faster than food production (which is already in decline)


• Food imports are growing faster than food exports.

The Australian food industry from paddock to plate is being loaded up with costs which may well make Australian products uncompetitive in our domestic market. The proposed “carbon tax” will multiply those costs exponentially. Our export competitiveness will be further undermined because we’re loading up Australian primary producers, processors and manufacturers with costs that are not being borne by our overseas competitors.

Food processors and manufacturers are not getting an adequate return on their investments because they are effectively at the mercy of two huge retail conglomerates which can cross-subsidise their own operations and expansion from the monies they make through poker machines, liquor, petrol stations, general retailing, office supplies, hardware and home electronics.

As a result of that market concentration and government-imposed costs, we are preparing to export thousands of jobs.